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4 Golden Rules of Investing in Retirement

Matt Bell — Thu, 19 Jul 2018 08:00:09 +0000

After you've spent a lifetime investing for retirement, it can feel very different to invest in retirement. Many retirees are hesitant to start withdrawing from the nest eggs they've carefully built over the years. And, they sometimes feel especially nervous about managing that account, knowing it needs to last as long as they do.

Thankfully, there are some guidelines that can help. Here are four golden rules for investing in retirement.

1. Don't be too conservative

Longevity is increasing. Your retirement could last for two decades or more. According to the Social Security Administration, a 65-year-old man today can expect to live to nearly age 85. A 65-year-old woman today can expect to live past age 86. And those are just averages. Many people will live well into their 90s.

Of course, given a choice, most people would prefer to live a long life. However, the more years you spend in retirement, the longer your nest egg will need to last. That's why it's important to avoid being overly conservative with your investments in your later years. Bond-like returns will only get you so far. (See also: 5 Ways Longevity Is Changing Retirement Planning — And What to Do About It)

This reality is reflected in many of today's target-date funds. For example, Vanguard's Target Retirement 2020 fund, which is designed for people right on the cusp of retirement, currently has 54 percent of its assets invested in stocks. The lowest level of stock exposure Vanguard's target-date funds ever hit is 30 percent, which occurs seven years after each fund's target date. Thereafter, it remains fixed.

If you're managing your own portfolio, you would be wise to take a page from these professionally managed portfolios and make sure you're maintaining a healthy exposure to stocks. (See also: 7 Reasons You're Never Too Old to Buy Stocks)

2. Don't be too aggressive

By the same token, you can't afford to get carried away with risk. With the current long-running bull market showing few signs of running out of steam, it may be tempting to take on more risk than you should, especially if you feel somewhat behind on your retirement savings. But that would be dangerous to your portfolio and your peace of mind.

Instead, trust the rules of asset allocation. If your optimal asset allocation calls for a 50/50 stock/bond mix, stick with that. One day, the bull market will end and you'll be glad you weren't invested any more aggressively than you should have been. If you're not sure what your optimal mix should be, Vanguard's asset allocation questionnaire can help you figure it out.

Remember, if your nest egg isn't as large as it should be, you have other options besides taking undue risk with your investments. For example, if you're still in the workforce, pushing back your intended retirement date even by a few months or a year can make a noticeable difference in your financial health. (See also: How One More Year of Work Can Transform Your Retirement)

3. Consider maintaining a cash "bucket"

One of the biggest threats to your portfolio in retirement goes by the fancy name of sequence of returns risk. That refers to the possibility that the market could fall just as you enter retirement. While the market naturally ebbs and flows over time, a significant downturn right at the start of retirement can put a strain on your cash flow throughout retirement.

Especially if you lean toward the conservative side of the risk spectrum, one way to manage that risk is to implement the bucket strategy — creating a cash account containing two to three years' worth of essential living expenses. That can help you avoid having to withdraw from your investment account in a bear market.

When the market is falling, you draw living expenses from your cash bucket, giving your investment account time to recover. When the market is growing, you draw from your investment account while also using a portion of your gains to refill your cash bucket. (See also: 8 Ways to Preserve Your Net Worth in Retirement)

4. Make sure you're on the same page as your spouse

Within many marriages, there's a division of labor, with each spouse taking the lead in different areas. If one of you has been managing the investments, now is the time to bring the other into the process. Otherwise, when the investment-manager spouse dies, it can leave the surviving spouse ill-equipped to take over.

If you handle the investments in your household, start talking about your investments with your spouse. How many accounts do you have and what's the total balance? What are the online passwords? What strategy are you following with your investments? If you were to die first, how would you recommend your spouse manage the account? If you're using a fairly involved approach, is there a simplified alternative? (See also: 5 Money Conversations Couples Should Have Before Retirement)

One of the sweetest rewards of a life lived well is peace of mind in your later years. When it comes to experiencing financial peace of mind during retirement, the four steps described above should help.

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This article is from Matt Bell of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

How to Start Investing With Just $100

Kat Tretina — Wed, 20 Jun 2018 08:30:29 +0000

When you're on a tight budget, investing often feels like something only wealthy people can afford to do. If you have just a few dollars left over every month, you might think it's out of reach for someone in your shoes.

This is particularly true among young people. A 2016 Stash survey reported that 41 percent of millennials feel that they don't have enough money to invest in the stock market — and 70 percent feel they need at least $100 to get started. That mentality can be a costly mistake. If you don't invest, you greatly risk underfunding your retirement savings.

The thinking that you have to be wealthy to invest is false. There are ways you can get started in investing without having tons of cash on hand. Below, find out more about some low-cost ways to enter the stock market. (See also: You Can Start Investing With a Lot Less Money Than You Think)

5 ways to invest with little money

Many traditional brokers have high minimum investments. For example, Vanguard has a $1,000 minimum if you want to open a Roth IRA and $3,000 for some other accounts. When you have just a few dollars to invest, opening an account with a traditional broker can be impractical, if not impossible.

Plus, they can be confusing. They throw a lot of jargon at you — mutual funds, index funds, exchange-traded funds (ETFs) — and it can be overwhelming to a new investor. However, investing doesn't have to be overwhelming or expensive. Here's how you can get started. (See also: Investments Worth Making With $50 or Less)

1. Invest your spare change

If your budget is tight and finding even $50 a month to invest is impossible for you, spare change investment apps like Acorns might be a smart option.

With Acorns, you connect your credit and debit cards to your account. Any purchase you make — including routine things like groceries or gas — is rounded up to the next dollar amount and the extra change is invested. For example, if you bought lunch and it cost $6.50, the app would round it up to $7, depositing the extra 50 cents into your investment fund.

Once your change totals $5, the app invests that money into a portfolio of your choice. Acorns offers five versions based on your comfort with risk, and costs between $1 and $3 per month to use. (See also: Everyone's Using Spare Change Apps — Are They Really Worth It?)

2. Engage in micro-investing

If you have some extra money in your budget, you can go a step further than just investing your spare change. Micro-investing — where you invest small amounts — can help you build a portfolio. Robinhood is a no-fee micro-investing app you can use to buy stocks and ETFs. All you need to get started is enough money to buy one share. Depending on the company or ETF you choose, that could be as little as $25. (See also: With Micro-Investing, Your Smartphone Pays YOU)

3. Set up a recurring transfer with a robo-adviser

As your income grows and your financial situation improves, investing spare change and micro-investing might not be as effective as it should be. Your investments with those apps might only add up to $15 to $20 per month. That's a good start, but you'll get better results by investing larger amounts.

You can set up a recurring transfer with sites like Betterment to take your investments to the next level. Betterment is a robo-adviser service, which can be helpful if you don't know much about the stock market and you want guidance on what kind of stocks and funds to choose. Betterment charges a .25 percent annual fee for accounts under $100,000. (See also: 9 Questions You Should Ask Before Hiring a Robo-Adviser)

That recurring $100 per month transfer can pay off in the long run. If you are 25 and make a one-time $100 investment, that $100 would turn into $2,172 by the time you're 65 (assuming an annual return of 8 percent).

Continue to contribute month after month, and you can see even more significant returns. If you set up recurring $100 contributions and stuck to that schedule until you were 65, you would have invested $48,000 of your own money. But, thanks to the stock market, your balance would grow to a whopping $337,909. (See also: 7 Reasons Millennials Should Stop Being Afraid of the Stock Market)

4. Set up a CD

If you're not ready to enter the stock market, there's another way to invest: Setting up a certificate of deposit (CD). With a CD, you essentially loan money to a bank, and they pay interest to you on the loan. The returns are higher than that of a regular savings account, however, they still won't be nearly as high as if you'd invested in the markets. You also can't touch that money for a set period of time; usually 12 months or more. (See also: The Best Ways to Invest $50, $500, or $5,000)

5. Start investing in a 401(k)

If your employer offers a 401(k) plan, you can start investing right away; there's no minimum to open an account. You can set up regular deductions from your paycheck, so the money is invested automatically every single month. You likely won't even notice it.

You can start investing small amounts, if that's all you can afford at first. For example, you can set your 401(k) contributions to as little as $25 each pay period. Over time, compound interest can turn those small investments into big returns.

As you earn more money, you can increase your monthly contributions. Your employer may even offer a company match on those contributions, which is free money you should never turn down. (See also: 8 Critical 401(k) Questions You Need to Ask Your Employer)

Finding money to invest

You really can't afford to avoid the stock market if you plan on having a stable retirement. Without the muscle of annual returns, you run the very real risk of coming up short.

If you're already stretched thin and can't find any extra money to invest, focus on boosting your income and using that extra cash to get started. You can consider asking for a raise, taking on a side gig, or selling some hot-ticket items around the house. (See also: 4 Best Ways to Invest Your First $1,000)

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This article is from Kat Tretina of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

7 Ways to Compare Stock Market Investments

Tim Lemke — Mon, 23 Apr 2018 08:30:09 +0000

When investing, we are faced with an overwhelming menu of things to choose from. There are tens of thousands of stocks, a mind-boggling number of mutual funds and ETFs, plus a dizzying array of bonds. How can we make sense of any of this to decide what makes a good investment?

It helps to know the basic elements of an investment so you know how to compare one product to another. This may require some work, but it can often be fun to dig into the details of why one investment is better than another. Here are some key things to examine.

1. Growth potential

Most people that are far away from retirement age seek investments that will grow over time. Ideally, they're looking for investments that will allow them to build a sizable retirement fund and outpace the returns offered by a basic bank account. There are some investments, such as stocks, that historically rise in value and are great for younger investors. Mutual funds and ETFs can offer solid growth as well. Bonds, however, are more likely to offer lower, but more stable returns.

As you become savvier in grasping the inner workings of specific investments, you can become skilled at knowing when an investment is undervalued and perhaps poised for big growth — or overvalued and ready for a price decline. Understanding the growth potential in certain investments can help you find the right mix for your individual portfolio. (See also: 9 Ways to Tell If a Stock Is Worth Buying)

2. Sector and industry

If you don't know a lot about a stock investment at first, it helps to learn what the company does to make its money. Companies are grouped into sectors based on the type of business they operate in; within sectors, there are smaller segments called industries. Typically, stocks are grouped into 11 different sectors — including health care, financials, energy, and consumer staples, to name a few — and there can be anywhere from two to 15 industries in each sector. A well-balanced stock portfolio will have some exposure to all of these sectors and as many of these industries as possible.

When investing, it helps to learn how these sectors perform compared to the broader stock market. Some sectors perform better than the market, while others underperform. Some are resilient in tough economic times, while others are more vulnerable to bad news. Understanding these industries can help you make smart comparisons when evaluating stocks.

3. Market capitalization and asset class

Stocks are usually categorized by size, also referred to as market capitalization. A company's market capitalization, or market cap, refers to the value of all outstanding shares (which is its stock price multiplied by the total number of shares outstanding).

There are large-cap stocks, which comprise the largest publicly traded companies. There are mid-cap stocks, which are medium-sized firms. And there are small-cap and even micro-cap stocks, comprising smaller companies. These categories are also called asset classes.

Generally speaking, large-cap stocks offer solid, steady growth potential for shareholders. Shares of smaller companies can offer bigger returns, but may also be riskier investments. Understanding the unique characteristics of stocks in each asset class can help you make comparisons between investments and find stocks that make sense for your financial goals.

4. Risk and volatility

Stocks of smaller companies can be riskier than some other investments. Understanding risk — and your own tolerance for it — can help you compare investments with confidence.

It's important to note that the potential for higher returns comes with the potential for higher risk. Finding that risk-reward sweet spot is the key to successful investing. Too much risk can result in you losing a lot of money. Avoiding risk altogether may prevent you from getting the returns needed to reach your financial goals.

Volatility and risk go hand in hand. When an investment goes up and down in value rapidly, we often say it's a volatile investment. There are ways to make money off that volatility, but for most investors, it's best to see steadier, consistent returns. (See also: How the Risk Averse Can Get Into the Stock Market)

5. Earnings, and earnings per share

Companies make money. They also spend it. When companies make more money than they spend, that's usually a good thing for everyone, including investors. This extra money is often referred to as net earnings. And as an investor, you want to see earnings increase over time.

When comparing two companies in the same industry, it can help to examine earnings to see which may be doing better financially. But it's also important to look at earnings in the context of a company's size. To do this, simply take the earnings total and divide it by the number of shares outstanding. So, a company with $9 million in earnings and 20 million shares would have earnings per share of 45 cents. (See also: Beginner's Guide to Reading a Stock Table)

6. Financial news

Sometimes, just paying attention to the headlines can help you grasp whether an investment is a good one or not. Financial news can let you know of macroeconomic trends that may help or hurt certain investments, and update you on specific news regarding companies or products. When trying to decide between investments, do a quick news search to see if there's anything big you need to know. You don't have to go overboard; you can overwhelm yourself reading financial magazines and watching CNBC all day. But staying generally informed can certainly be helpful.

7. Dividends and dividend yields

Many companies choose to distribute earnings to shareholders on a quarterly basis. This is great if you are a shareholder, because it's free income just for owning shares. When examining dividends, you should look at both the amount of the dividend and the "yield," which is the amount when compared to the share price.

For example, a company may pay shareholders 50 cents per share they own every quarter. That's the dividend yield. If shares of the company are priced at $35, the yield is about 1.4 percent per quarter, or 5.6 percent annually. When examining dividends, look to see if a company has a history of maintaining or even increasing dividends each year. If they do, that's a sign of a company on strong financial footing.

Keep in mind that if a company doesn't distribute dividends, that's not necessarily a bad thing. Many fast-growing companies choose to instead reinvest their earnings into business operations, and this can often help boost growth and make the company more valuable over time. Amazon may be the best example of a strong company that does not pay dividends.

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This article is from Tim Lemke of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

8 Startling Facts That Will Make You Want to Invest

Tim Lemke — Wed, 14 Mar 2018 09:01:08 +0000

Sometimes you need to be startled into action when it comes to investing. It's easy to come up with excuses not to begin placing money in the markets and saving for retirement. Armed with the right information, however, most people would likely choose to invest rather than stay on the sidelines.

Perhaps it's time to digest these eye-opening facts and realize that waiting to invest could be a big mistake.

1. The average retirement savings is measly

According to a 2016 survey from the Transamerica Center for Retirement Studies, baby boomers have an average retirement savings of $147,000. Those from Generation X have an average $69,000, while millennials have $31,000 saved. Those figures have probably risen slightly in the last two years, but are still well shy of the totals necessary for a comfortable retirement.

Older people approaching retirement age may have held off investing in their earlier years and are now playing catch up. Younger people have more time to invest and get to where they need to be — but the longer they wait, the harder it gets. (See also: 7 Retirement Planning Steps Late Starters Must Make)

2. You may be retired longer than you worked

Imagine starting work at 21 and retiring at 60. That's 39 years in the workforce. If you live to 100, that's an additional 40 years — longer than the time you spent working! People are living longer these days, so it's not uncommon to see retirees still kicking it well into their 90s and beyond. In some cases, retirements are stretching past 40 years. Are you doing all you can to allow your money to last that long? Smart investing may be the only way to accumulate enough cash to support a retirement of that length. (See also: 5 Ways Longevity Is Changing Retirement Planning (And What to Do About It))

3. Very few people get a pension these days

Defined benefit plans, in which a company guarantees workers a specific amount of money each year in their retirement, have been going away fast. Today, only 13 percent of nonunion private sector workers have access to a defined benefit plan, according to the Bureau of Labor Statistics.

Instead, most companies now only offer defined contribution plans, such as a 401(k). With these plans, workers must invest their own money, and companies may offer to match a certain percentage of contributions (some don't). If you're in the workforce, it's likely incumbent upon you to take charge of your own retirement savings. (See also: If You're Lucky Enough to Receive a Pension, Here Are 6 Things You Need to Do)

4. Half of workers say they'll probably work during retirement

Isn't the entire idea of retirement to stop working? For many people, ceasing to work entirely just isn't in the cards. The Transamerica survey revealed that about half of all workers — including baby boomers, Gen Xers, and millennials — expect to work at least part-time during retirement. Working is fine if you want to, but if you dread the idea of punching a clock in your old age, invest now.

5. About 20 percent of seniors rely on Social Security for nearly everything

Social Security is certainly better than nothing if you're retired, but it's not a lot of money. The maximum Social Security benefit for 2018 is $2,788 per month, or about $33,500 a year, if you retire at age 66. You could get up to $3,698 monthly if you are willing to wait until age 70 begin accepting payments.

You won't starve, but you're not going to be cruising the Mediterranean, either. And yet, roughly one in five Americans over 65 rely on Social Security for 90 percent or more of their income, according to a 2015 study from AARP. There are some states where this figure rises to more than one in three older residents. This is a startling figure when you consider that Social Security is currently running a deficit. Invest now, so that Social Security can be like icing on your retirement cake. (See also: 5 Questions to Ask Before You Start Claiming Your Social Security Benefits)

6. The market rarely has bad years

Everyone remembers when the market crashed about a decade ago during the financial crisis. And there have been some high-profile bad years in the past. But consider this: Since the end of World War II, the S&P 500 has recorded a negative annual return just 15 times. That's 15 bad years out of 72. The New York Yankees have won 17 World Series titles during the same period! Only once since World War II — from 2000 to 2002 — has the market had three bad years in a row, and there's only one other instance of back-to-back negative annual returns. So even if you had no idea what year it was and still chose not to invest, you'd likely be missing out on positive returns. (See also: How the Risk Averse Can Get Into the Stock Market)

7. Almost as many people own dogs as stocks

About 54 percent of Americans own stocks, according to research from Gallup. Meanwhile, the American Pet Products Association reports that 48 percent of Americans own dogs. Dogs are nice. Dogs can be enjoyable. Dogs are good to have in retirement as companions, but they won't appreciate in value or help pay the bills as you get older.

Invest now, and you can have a comfortable retirement, complete with as many canine friends as you want.

8. If you invested $100 in Amazon 20 years ago, you'd have $50,000

When Amazon went public in 1997, its shares were trading at about $18. As of this writing, the company is now trading at more than $1,300 per share. A simple $100 investment 20 years ago would be worth tens of thousands today. Of course, Amazon's stock returns aren't typical. But it goes to show how even a modest investment over time can prove to be enormously lucrative.

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This article is from Tim Lemke of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

Start an Investment Deathmatch to Find the Best Investments

Dr Penny Pincher — Tue, 13 Mar 2018 09:30:19 +0000

You can learn a lot about investing by setting up what I call an "investment deathmatch" in your portfolio. In such a setup, your hand-picked investments compete with each other to produce the best return and rack up the biggest balance.

An investment deathmatch starts off by investing equal amounts of money in several investment funds at the same time. This makes it easy to monitor how your investments are performing relative to each other simply by glancing at the fund balances.

Some benefits of this "investment deathmatch" approach for your portfolio are:

You get the experience of picking out multiple investments.
You learn from seeing how different investments perform over time relative to each other.
Your portfolio risk is reduced due to diversification.
Based on your investment performance results, you can invest more money in your best performing funds.

Here's how to set up your own investment deathmatch.

1. Select categories of funds

While you could pick funds from the same investment category to compete in your deathmatch, there is more to be learned by selecting funds from a variety of categories. Plus, you will build a more diversified portfolio if you choose a variety of funds, reducing your risk in case one investment sector falters.

Here are some ideas for fund categories to choose from:

S&P 500 index fund: A good "pace car" to see how your other investments perform relative to large-cap equities in the stock market.
Growth fund: Will a growth fund provide better returns than the overall market?
Mid-cap fund: Mid-sized businesses have established products and customer bases and lots of room to grow.
Just-for-fun: Pick an international fund, real estate investment trust (REIT), gold fund, or whatever investment you think is interesting and could perform well.

2. Pick your funds

Now that you have outlined your investment categories, it's time to do your homework and pick your favorite fund in each category. Some of the key criteria to consider when selecting funds for your investment deathmatch are:

Investment objective: Do you want an aggressive growth fund that takes higher risks to seek higher returns, or would you rather have a more conservative fund that will be more likely to protect your investment?
Active vs. passive management: Do you want a fund with a fund manager making trades to try to maximize returns, or a passive fund that simply tracks a segment of the market?
Fees (expense ratio): Funds with lower fees are best for maximizing the growth of your investment over time, but some investment types are more complex and tend to have higher fees. Actively managed funds have higher fees than passive funds and index funds.
Performance record (return): While past performance does not predict future results, most investors tend to select funds with returns that have performed well compared to similar funds over the past one to five years.
Management team tenure: Some investors prefer funds that have had a consistent management team for a number of years.

3. Invest exactly equal amounts in each fund

With your investment funds picked out, the next step is to invest exactly equal amounts in each one. For example, for a $2,000 investment with four funds in your deathmatch, put exactly $500 in each fund to start off the competition.

The reason for putting the exact same amount in several investments on the same day is to make it easy to compare the performance of your funds simply by checking the fund balances at any time. You don't need to keep track of anything or calculate rate of return to evaluate their performance. Whichever fund has the biggest balance is winning.

Of course, you will need some money to fund your investments. If you already have cash in hand (in after-tax dollars), it might be easier to invest the funds in a Roth IRA rather than a traditional IRA. Another source of funding to start an investment deathmatch is to execute an exchange to sell funds you already own and move the proceeds into the funds for your deathmatch. This can be done easily in a traditional IRA, Roth IRA, or 401(k) plan.

4. Watch and learn as funds compete to make you money

Now for the fun part — watching your fund choices fight it out to see which will perform the best. The investment deathmatch format makes it effortless to see which investment are performing well simply by checking in on the fund balances. There is no substitute for the experience you get picking out funds and investing your own money to learn what works and what doesn't.

5. Start new investment deathmatches as a smarter investor

Over time, some of your investments will perform better than others. You might decide to leave the best performing funds in place and start a new deathmatch using funds from investments that are not performing as well.

You can pick a different amount to invest in each deathmatch you start so you can better track which funds are directly competing with each other. For example, if you have a deathmatch running with $500 investments, you could start another one with $1,000 investments so you can tell which investments are in which deathmatch.

The funds in your investment deathmatch are competing to win the title of best investment, but the real winner is you. You get an easy way to learn about investing all while watching your portfolio grow.

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This article is from Dr Penny Pincher of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

7 Reasons You're Never Too Old to Buy Stocks

Tim Lemke — Mon, 12 Mar 2018 09:00:06 +0000

One common rule of thumb for investors is to move away from stocks into more conservative investments as you get older. The thinking behind this is that stocks always carry the risk of losing value, and that's not something you want to see with your retirement fund.

But completely abandoning stocks may not be the right strategy, either. Holding some stocks in your portfolio can be a hedge against inflation, and can help ensure that your retirement money lasts as long as you do.

Here's a look at some reasons why, even for older investors, stocks are always a good buy.

1. You may live longer than you think

Many people assume that once you approach retirement age, all of your efforts should be focused on protecting your assets rather than growing them. But the reality is that many retirees will need their money to last 30 years or more, and the only way to make money last that long is to continue to accumulate it.

Having some money in stocks will, in most years, allow you to replenish money that you spend from your portfolio. Consider this: If you have a nest egg of $1 million and spend $50,000 annually, your savings will be gone in about 20 years. But if you are able to add 4 percent to your portfolio each year from stocks, your savings could last another decade or more. (See also: 5 Ways Longevity Is Changing Retirement Planning (And What to Do About It))

2. Many stocks can be safe investments

We tend think of stocks as risky and volatile investments, but that's not always the case. Many stocks are actually very common and useful investments for people looking to bring stability to their portfolio.

Dividend stocks are a common component of retiree accounts, because they generate income for the investor and generally don't rise and fall dramatically in price. There are also some industries, such as consumer goods, that have offered steady returns year in and year out. Some stocks, such as Wal-Mart, are good bets even during bad economic times. You don't have to lay off stocks entirely as you get close to retirement age. It's just a matter of finding stable, income-producing stocks that can serve you well as you get older.

3. Markets rebound fairly quickly

No one likes to see the stock market take a big dive, but the good news is that it always goes back up. There are only a handful of times in history when the stock market has had consecutive down years. Moreover, years with negative returns are often followed up with positive returns of greater magnitude. History shows that if you lose money in the markets one year, you'll likely make that money and more back within a few years. In other words, even if you are well into your senior years, you're unlikely to see your entire savings gone in a single swoop. (See also: 6 Confidence-Inspiring Facts About the Stock Market)

4. Stocks don't need to comprise your whole portfolio

Buying stocks when you are at or near retirement age is only a bad idea if you're not also invested in more stable things like bonds and cash. Stocks don't have to make up 100 percent of your retirement fund. They don't even have to make up 50 or 25 percent. But having stocks as a relatively small percentage of your portfolio can help make your money last longer without adding much risk.

For example, let's say you have $1 million in your retirement fund. And let's say 10 percent of that ($100,000) is in stocks, with the rest in bonds and cash. If the stock market were to take a dive of 30 percent in one year, you might lose $30,000 from the stock portion of the portfolio. That's $30,000 out of a total of $1 million saved, or just 3 percent of your total savings. You'd still have $970,000 left. Given that the market historically goes up more than it goes down, this is a reasonable risk to take. (See also: How the Risk Averse Can Get Into the Stock Market)

5. Returns from bonds and cash are lousy these days

For many years, it was common for Americans to get good returns on government and municipal bonds, as well as normal savings accounts and certificates of deposit. Thus, retirement accounts were constantly being replenished with new money.

Nowadays, interest rates are still at some of their lowest rates in history, so it's easy to see how your personal spending rate will outpace the returns from your retirement funds. In fact, there is some risk that your returns may not even outpace the rate of inflation. Only with stocks will you be able to see the types of gains once seen from bonds and cash in the past, and you'll never be at risk of seeing inflation eat away at your nest egg.

6. Transgenerational wealth is a powerful thing

Have you ever wondered how massively wealthy people got their money? It's often because they inherited it. In fact, many younger Americans say they are expecting a sizable inheritance. According to a recent survey from Natixis, 60 percent of millennials believe they will inherit some money from their parents.

If you want to ensure financial security for your children and even generations beyond, your own personal retirement time horizon is irrelevant. Only through stocks can you continue to accumulate returns that generate the kind of wealth that will transform the lives of your heirs.

7. Stocks are just more fun

Cash is safe. Bonds are safe. But they are boring as heck. And it's downright wrong to assume that older people can't have some excitement in their lives.

Placing money in the stock market and watching it grow is fun. Being a shareholder of a company is fun. And if you are retired, you actually now have time to pay attention to your investments. Of course, you never want to let a desire for fun force you into a silly investment decision. Stocks should comprise a relatively small section of retirement funds for older people. But I'm not about to tell our seniors they can't let loose a little bit. (See also: 7 Reasons to Invest in Stocks Past Age 50)

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This article is from Tim Lemke of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

6 Questions All Rookie Investors Should Ask

Matt Bell — Tue, 06 Feb 2018 09:30:08 +0000

The first time you got behind the wheel of a car, you were probably a little intimidated. The same can be true if you're just getting started with investing. Here are some questions that may be on your mind, along with answers designed to help you begin your investing journey with the knowledge you need to succeed.

1. Why should I invest?

Especially if you're young, investing might not seem very urgent. Investment goals, such as retirement, may seem distant and vague.

The financial services industry has tried everything to get people to recognize the importance of investing for retirement, even using photo-enhancing software to show young people what they may look like when they're 65 or 70. A 2012 Merrill Edge study actually found the tactic somewhat effective in motivating people to save more for their later years.

Assuming you don't have access to such technology, maybe the best way to find the motivation to invest is to consider the cost of waiting. Crunching the numbers just may be the wake-up call you need.

2. What's the harm in holding off a little while?

The sooner you start investing, the less you'll have to invest each month in order to meet your goals.

Let's say you're 25 years old, plan to retire at age 70, and want to accumulate $1 million by then. Assuming a 7 percent average annual return, you would need to invest about $275 per month. Even waiting just five years will significantly increase that amount. Starting at age 30, you would need to invest about $361 per month in order to accumulate $1 million by age 70.

Here's another way to think about it. If you invested $200 per month from age 25 until age 70 and generated an average annual return of 7 percent, you'd end up with about $733,804. Wait until age 30 to start investing $200 per month, and you'll end up with $512,663.

That's amazing, isn't it? By investing for just five fewer years, you will invest just $12,000 less than if you had started at age 25. And yet, because of the power of compounding — more accurately, because of missing out on five years' worth of the power of compounding — you'll end up with about $221,000 less. That's a huge penalty for waiting. (See also: 11 Investing Tips You Wish You Could Tell Your Younger Self)

3. How much should I invest?

To get a general sense about how much to invest each month, use the Fidelity Retirement Score calculator. Once you run some initial numbers, you'll be able to see how changing some of your variables, such as how much to invest and when to retire, will impact your how much money you end up with.

4. Should I use my company's 401(k) plan or an IRA?

The key to answering this question is whether your employer offers a match on some of the money you would contribute to its 401(k) plan. If so, start there.

In a typical arrangement, an employer will match your contributions up to 6 percent of your salary. If yours will contribute a dollar for every dollar you put in, that's a guaranteed 100 percent return on your money. If it will match 50 cents for every dollar you contribute, that's a guaranteed 50 percent return on your money. Don't miss out.

If your employer doesn't offer a match, the decision depends on the investment options it offers. There are still some employers whose plans contain a strange mix of mutual funds with high fees (you should not be limited to funds with "expense ratios" higher than 1 percent). If that's the case with your employer's plan, you may be better off using an IRA. However, even with a solid 401(k) plan at your disposal, don't think an IRA isn't for you. Contributing to both plans can give you a further leg up in your retirement savings strategy. (See also: 401(k) or IRA? You Need Both)

5. What should I invest in?

It used to be a lot more complicated and intimidating to figure out what investments to make. Today, target-date funds have simplified the process. By choosing a single mutual fund that has the year of your intended retirement date as part of its name, such as the Fidelity Freedom 2040 Fund, you'll gain a portfolio that's diversified across stocks, bonds, and other asset classes in a way that's appropriate for someone your age. As you get older, the fund will automatically adjust its investment mix, becoming more conservative as you near your target retirement date. (See also: What You Need to Know About the Easiest Way to Save for Retirement)

6. What can I expect from my investments?

In short, you can expect that the ride will not always be smooth. Last year, the S&P 500 generated a nearly 22 percent return, but in 2008 it fell 37 percent.

Investing always comes with risk, and there's no way to predict how each year will turn out. A solid approach is to build a diversified portfolio, perhaps through a target-date fund, and commit to staying with it in good years and bad.

The longer you stay invested, the better your odds of success. As Morningstar documented in its 2017 Fundamentals for Investors report, from 1926 through 2016, 74 percent of one-year returns from the U.S. stock market were positive, 86 percent of five-year returns were positive, and 100 percent of 15-year returns were positive.

As with so many things, the best way to learn about investing is to get started. Taking the steps described above should get you moving in the right direction.

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This article is from Matt Bell of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

7 Fastest Ways to Recover From Holiday Overspending

Dan Rafter — Tue, 02 Jan 2018 10:00:06 +0000

Consumers said they planned to spend an average $967 during the 2017 holiday season, according to research from the National Retail Federation and Prosper Insights & Analytics.

That's a lot of money, and you can bet that plenty of holiday shoppers blew their budgets in the process. But here's some good news: Even if you were overly generous this season, you can take steps to recover financially from all that holiday overspending. (See also: 8 Secrets to a Debt-Free Holiday Season)

1. Return what you don't want

If you were generous with others this holiday season, they might have been equally generous with you. This means you might have plenty of holiday gifts sitting around — maybe some gifts you don't even want or need.

If you have the receipts, by all means, return them. Hopefully, you can get cash in exchange. But even if you can't, you'll probably be able to turn your unwanted gifts into store credit. You can then shop at that store on someone else's dime without dipping into your own wallet.

Don't worry about hurting someone's feelings here. The main point is to get back on your feet financially, and every little bit helps. (Besides, you don't have to tell Aunt Julia that you aren't going to wear that sweater.)

2. Use those gift cards

The odds are high that you received gift cards this year. The National Retail Federation estimated that 2017 holiday shoppers each planned to purchase around four gift cards with an average value of $45 per card.

Too many people throw them in a drawer or tuck them in a wallet and then forget about them. If you got gift cards, use them. Again, these handy cards will let you purchase clothing, electronics, or restaurant meals without you having to spend your own cash. Then, send the dollars you're saving on those splurges toward paying down credit card or other high-interest debt. (See also: How to Turn Unwanted Gift Cards Into Cash)

3. Pay more than the minimum on your credit cards

You might not want to think about credit card debt right after the holidays, but it's important to not ignore it. Whatever you do, don't only make the minimum required payment. If you do, it can take you years, and cost loads of interest, to pay off that debt.

Say you owe $7,000 on a credit card with an interest rate of 18 percent. If you make the 4 percent minimum required payment each month, it will take you 147 months — or more than 12 years — to pay off that debt. You'll also pay a total of more than $11,000 on the card. And that assumes you don't make any additional purchases with it.

Your goal is to pay off more than the minimum every month. Otherwise, you'll be paying off those holiday mittens and scarves for years. (See also: Dealing With Post-Holiday Credit Card Debt)

4. Stop adding to your debt

Of course, you'll struggle to ever pay off your holiday debt if you don't first stop adding to it. Make a resolution to stop using your credit cards to pay for items. Instead, use your debit cards or cash for your purchases.

This will require planning, and maybe a bit of sacrifice. You might have to wait to buy that new laptop until you've saved up enough to pay for it in cash. But you'll be thankful as you watch that credit card debt steadily disappear.

5. Start an emergency fund

If you've resolved to pay down your holiday debt, you'll need savings. What if your water heater bursts or your car conks out? If you don't have any money saved up, you'll have to put those repairs on your credit cards, adding more to your debt levels.

A better move is to start creating an emergency fund. As the name suggests, an emergency fund is a stash of cash that you stow in a safe place, like a savings account. You withdraw from the fund to cover any unexpected emergencies.

You'll eventually want an emergency fund that has from six months' to a year's worth of daily living expenses in it. That may sound intimidating, but you can start slowly. By investing at least $200 a month in an emergency fund, you'll have $2,400 by the time a year passes. (See also: 7 Easy Ways to Build an Emergency Fund From $0)

6. Make some sacrifices

The more money you have to devote to your holiday debt, the better. Start the new year by cutting back on unnecessary expenses. All those trips to restaurants and the movies add up. If you cut down on your discretionary spending, you might have $200 or more extra each month to put toward reducing your holiday debt.

7. Get in selling mode

Maybe you received plenty of stuff during the holiday season — you might even have too much stuff. If so, sell some of it off, either online or through a yard sale. The extra money you make by selling a Crock-Pot or tablet that you no longer need can bring in some much-needed extra cash that you can use to pay down that mountain of debt.

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How to Pick Your First Stocks and Funds

Tim Lemke — Tue, 19 Dec 2017 09:00:07 +0000

You know you need to start investing, but you’re not sure where to begin. There are a million different investments, so how can anyone determine which to start with?

There is no real wrong way to begin investing, but it helps to start in a familiar place and educate yourself about some of the most common stocks and mutual funds. Follow this advice, and you’ll be well on your way to building a great investment portfolio.

Pick something you know

When just getting started, it helps to have some familiarity with the company you are investing in. So go with a company whose products or services you use every day. Maybe it’s Starbucks, or Walmart. Perhaps it’s Coca-Cola or Pepsi. Do you have an iPhone? Investing in Apple might make sense for you. By starting out with something you know, you’ll have a greater interest in tracking the stock’s movements and paying attention to the company’s operations.

It’s also fun to know that when you buy something from the company, you may be indirectly boosting the stock price. Moreover, if you invest in something well known, it’s likely to be an established company with some track record of success. (See also: How to Buy Your First Stocks or Funds)

Listen to your grandfather

You may tune out when your granddad starts espousing the virtues of shopping at Sears. But there are many companies that were huge 40 years ago that are still big today. Think Coca-Cola, General Motors, General Electric, IBM, or McDonald’s. These are still “blue chip” stocks that have shown consistent, solid shareholder returns over time.

In many cases, these companies don’t even do what they originally did when your grandfather was your age. But that’s OK. If your granddad has invested in a stock for decades and is living comfortably in retirement, it’s probably a solid stock. Following your grandfather’s advice is a great way to familiarize yourself with “large cap” stocks that include some of the world’s biggest companies. (See also: 9 Ways to Tell If a Stock is Worth Buying)

Go after growth

The entire point of investing is to see your money grow, right? So it’s a good idea to familiarize yourself with growth stocks. These are stocks that represent companies poised to see strong earnings growth over time, and are often in fast-growing industries, such as technology. Growth stocks will often have earnings and cash flow that are higher than the average company, and will often have some sort of competitive advantage that gives it an edge in the marketplace.

Famous tech companies including Apple, Netflix, and Alphabet are well-known growth investments. Smaller companies can offer great growth stocks as well, because their size allows for rapid increases in share value. Keep in mind, however, that growth stocks can often carry higher risk than other investments. (See also: What Are Growth Stocks?)

Find a good dividend stock

When learning to invest, it’s important to know that stocks cannot only grow in value, but provide you with some income along the way. Many stocks will pay out a portion of their income to shareholders in what is known as a dividend. Getting your first dividend payment can be very exciting. This is real money that a company gives you each quarter simply for being a shareholder. And many companies will shell out dividends at a rate much higher than interest from the bank.

When researching the best dividend-producing companies, look up how much the company will pay quarterly for each share of stock. That amount relative to the company’s stock price is known as the dividend yield. A good dividend yield, coupled with solid financials and some growth in share price, can make for a great company to invest in.

To find good dividend stocks, research the list of “dividend aristocrats.” These are companies that have managed to increase their dividend payments for 25 years or more. They include Procter & Gamble, Exxon-Mobil, and AT&T.

Invest in “The Market”

If you’re confused about what stocks or funds to purchase, why not invest in everything? Or at least a small piece of everything. There are many mutual funds and exchange-traded funds that are designed to mirror the performance of the broader stock market or major indexes like the S&P 500. You won’t necessarily “beat the market” with these investments, but you’ll see your investments move with the overall stock market, and get exposure to a wide range of companies in various industries.

These investments are often available with very low fees, as well. Good examples of these kinds of investments include the iShares Core S&P Total U.S. Stock Market ETF [NYSE: ITOT], Vanguard Total Market ETC [NYSE: VTI], or T. Rowe Price Equity Index 500 Fund [NYSE: PREIX].

Look for value

One of the most basic pieces of investment advice you’ll receive is to “buy low and sell high.” At its core, this means it’s smart to find investments that are undervalued and have a strong potential to grow and make you a profit over time. These “value” stocks aren’t always easy to find, but they have driven the portfolios of some of the world’s most successful investors, including Warren Buffett.

There are several key things to look for when searching for value stocks. First, it’s important to understand why a stock may have a low price. Often, it’s because the company is not doing well financially. But sometimes, a stock price can fall for reasons that have nothing to do with company performance, in which case it may be poised to rebound.

A company’s price-to-earnings (P/E) ratio is another thing to consider. You can determine this ratio by dividing a stock's earnings by its stock price. A low P/E ratio compared to other stocks may indicate it’s undervalued. (See also: Make Smarter Investments by Mastering This Simple Ratio)

If you are unsure of what value stocks to buy, consider mutual funds that zero in on value stocks. Popular options include the Vanguard U.S. Value Fund [NYSE: VUVLX] and the T. Rowe Price Value Fund [NYSE: TRVLX].

Understand competitive advantage

There are some companies that are just kicking butt. Their edge over their competitors is as vast as the Pacific Ocean, and they are practically synonymous with the industries they are in. Some investors refer to this as a “moat.” A company with a wide “moat” is often viewed as having a large enough competitive advantage to withstand any operating hiccup or economic downturn.

Think Amazon in the e-commerce sector, or Facebook in the area of social media. Alphabet, the parent company of Google, also leaves most of its competitors in the dust, and Walmart dominates the traditional retail sector.

If you’re looking to buy one of your first stocks, consider any company that seems to be just crushing the competition. You may not be able to get shares on the cheap, but you’ll be getting ownership in a company poised to make you money over time.

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Don't Be Fooled by an Investment's Rate of Return

Tim Lemke — Fri, 08 Dec 2017 10:00:07 +0000

When you invest, you are looking for return. You want your money to grow over time, preferably at a rate that will allow you to achieve your financial goals.

An investment's rate of return can be a deceptive thing, however. The amount of money that an investment has made in the past isn't a guarantee of future returns. Moreover, these returns by themselves don't tell you a whole lot about what you are investing in.

Learning how to analyze an investment's returns — and understanding its limitations — will help you on the path to financial freedom. Just remember these key facts about an investment's return when examining it.

Short time frames don't tell you much

"Hey, this mutual fund went up 29 percent last year! Woo hoo!" That's great, but what did it do the year before? And the year before that? How has it performed over the last decade? Looking at the rate of return for a single year is not particularly useful, as any investment can have a hot 12 months. To get a sense of how an investment may perform in the future, it helps to have a long record of performance to examine. Fortunately, most brokerages and financial websites have comprehensive information on historical returns, so you're not simply looking at the performance of the last year.

It offers no information on the type of investment

It's great if an investment has a solid rate of return, but that should not be the only consideration when looking to buy shares. If you are buying a stock, you need to ask yourself key questions aside from just looking at performance. What industry does the company operate in? How big is the company? Does it operate internationally? If you're talking about a mutual fund, what is the investment mix? Answering these questions will help you understand whether you already own similar investments, and whether it makes sense to add them to your portfolio.

It's almost useless without context

Let's say you come across a mutual fund that earned a 9 percent return last year. You might think that is pretty good, right? Well, it doesn't look so good when you consider the S&P 500 returned 11.96 percent. Information on returns is only meaningful when it is paired with information about the broader stock market, comparable investments, and specific indexes. A small cap ETF, for example, should be examined alongside the Russell 2000 index. A mutual fund focused on technology should be compared to prominent technology indexes. Fortunately, most brokerage firms and financial websites do provide this, so it's important to analyze market returns using that context.

It does not always factor in all costs

If you purchase a mutual fund or ETF, a certain portion of your investment is taken in expenses and fees. While mutual fund returns are usually reported net of expenses, not every cost is included in this calculation. Many funds have sales charges and commissions (also known as loads) that you pay when buying and selling. Your brokerage firm may also charge a commission to execute the trade. This can reduce your overall return. The good news is that there are many good no-load mutual funds out there, and many can be traded without a commission, depending on the broker.

One more caveat regarding costs. Capital gains taxes will also reduce your balance when you sell. Be sure to factor in these costs when examining an investment's rate of return.

It does not offer detail on volatility

Let's say you have a stock that rose in value from $50 to $90 in five years. The annualized return on that stock is 16 percent. But that does not tell you whether the stock's performance has been consistent or wildly up and down.

For example, during that five-year period, that stock may have risen 20 percent, then dropped 25 percent, then risen 44 percent, dropped 10 percent, and finally rose 53 percent. That's pretty volatile, and may be outside the comfort zone of many investors even though the overall return is good. To get a better picture of the investment's performance, you need to look at the returns from each individual year, but even that offers no insight into price swings within any given year.

It can't answer the question "Why?"

An investment's rate of return may be the crucial piece of information you need to know before investing, but there's a lot that it doesn't tell you. Perhaps most importantly, it does not offer any insight into why an investment's price moved up or doing during a certain period.

Investment values go up and down for a variety of reasons, not all of them related to company performance. Perhaps a retailer saw its shares fall sharply during one quarter due to a series of natural disasters. Perhaps another company saw shares rise dramatically because of hype over its Super Bowl commercial. Returns on investment are crucial to know, but if you are an investor, it's important to do your own homework to understand why a price went up or down. Doing so will help you better understand how an investment may perform in the future.

It gives you no information on fundamentals

An investment's historical rate of return can give you insight into how it might perform in the future. But the company's actual financial performance may be even more important. It's not enough to just examine an investment's return. You should also look at company balance sheets, analyze earnings reports, and look at things like cash flow, debt, and price-to-earnings ratio. This will help you understand whether an investment's price is justified. Examples abound of companies that saw share prices skyrocket based on speculation although earnings weren't there to support it.

It tells you nothing about taxes

Let's say you invested $1,000 in a company stock and it earned an annual return of 9 percent a year over five years. That means you'll end up with $1,450 when you sell, right? Well, not exactly. Remember that unless you are investing in a tax-advantaged account such as a Roth IRA, the government takes its share when you sell. Assuming that you'll be taxed at the long-term capital gains rate of 15 percent, suddenly, that 9 percent annual return became something closer to 7 percent. Keep this in mind when trying to calculate how much money you'll actually walk away with.

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Does Skill Really Matter in Stock Market Investing?

Dr Penny Pincher — Wed, 06 Dec 2017 09:00:07 +0000

My young son once expressed concern when I told him I had money invested in the stock market. Perhaps he had seen stories about blindfolded monkeys throwing darts picking better stock portfolios than "expert" traders.

"Buying stocks is just like gambling," he said.

"No, it isn't," I explained.

I am not sure my son was convinced by my explanation, and I began to doubt it myself. What made me so confident that my process of choosing stock market investments was better than random chance?

How lucky stock picks can beat the market

People tend to overrate their investment skills as their portfolio grows. Over the years, the stock market tends to go up and the value of anyone's portfolio — even a portfolio picked by a monkey — would likely go up. But the measure of a successful investor isn't merely getting a positive return on investment. Real success is beating the market by getting a return that is better than the market average. This is where the skill comes in … or does it?

Let's consider randomly selected stock portfolios drawn from the broader stock market. Most such randomly selected portfolios will perform near the overall rate of return for the market. Some of the stocks may perform better than average and some worse, but the ups and downs across the portfolio tends to work out to about average. But by pure luck, some portfolios will end up with more winners than losers and beat the market average. Sometimes these randomly selected portfolios do a lot better than the market average.

For some specific examples, let's simulate portfolios randomly drawn from a market with 10.5 percent return and a standard deviation of 20 percent after 20 years. Under these conditions, the average return portfolio value based on the broader market is $7,366. Here were my "returns" from eight randomly selected portfolios after 20 years:

$4,330
$34,603
$19,572
$9,971
$10,925
$1,482
$8,482
$3,460

You can see that five of our eight randomly selected portfolio beat the expected value of $7,366 from average market returns over 20 years. One portfolio (#2) beat the market significantly, achieving an annualized return of 19.4 percent and growing 4.5 times that of an average portfolio. This portfolio was selected by pure chance, but the performance looks like something that would take a financial genius to achieve. If you were lucky enough to put this portfolio together, people would probably be lining up to ask for your investment secrets to learn how you beat the market. And since you were so successful, you might believe you had actually figured it out!

Our simulation results show that by pure luck, an investor could end up with a portfolio that greatly beats the market. A dart-throwing monkey could pick a great set of stock picks by chance. Random picks can result in underperforming portfolios too, but people tend to notice the big winners.

We have seen how you can end up with a high performing stock portfolio by pure chance. Does this mean that successful investors are just lucky?

The argument for investing skill

As we have seen, it is possible to get lucky and beat the market. But some investors seem to beat the market consistently. It's one thing to get lucky once in awhile, but is someone like Warren Buffett just really lucky, or is there more to it than that?

From reports over the years, we can see that Berkshire Hathaway beat the market 39 out of 49 years, earning more than the market average rate of return. A 2015 paper by James Skeffington uses some simplifying assumptions to analyze the probability that such a run of success would occur by chance. In a simulation with randomly drawn portfolios of 500 companies to represent the S&P 500, Warren Buffett turns out to be luckier than the luckiest of the simulated portfolios by a factor of about 100x.

While this analysis does not conclusively prove that Warren Buffett has exceptional skill as an investor, it does indicate that luck alone is not likely to be the secret of Mr. Buffett's success as an investor.

Should you throw darts to pick stocks?

The conclusion that skill — not just blind luck — likely played a big role in Warren Buffett's investment success means you could potentially study up and make informed investments or find a fund manager that can consistently beat the market through skill. If you want a piece of Warren Buffett's action, you could buy Berkshire Hathaway at a premium or a similar fund at a discount. (See also: How to Buy Berkshire Hathaway and Other Blue Chip Stock for 17% Off)

But in general, past performance does not predict future performance. If you see a fund that is advertising good recent performance, it does not mean the fund will stay hot. It is impossible to know if a fund manager is good or lucky, and investment strategies that work now may not keep working forever.

You could follow Warren Buffett's advice and go with index funds with low expense ratios that take away some of the risks, expenses, and inefficiencies of actively managed funds. As Warren Buffett's famous $500,000 bet showed, a low expense index fund can beat an actively managed fund. This investment strategy allows you to be successful without luck or skill. (See also: Why Warren Buffett Says You Should Invest in Index Funds)

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Think Outside the Index When You Rebalance Your Investment Portfolio

Tim Lemke — Mon, 20 Nov 2017 09:30:10 +0000

As the year winds down, it's common for investors to examine their portfolios and consider some rebalancing. This means looking at your investments to make sure you're not over-invested or underinvested in certain areas.

Many investors will simply buy shares of a mutual fund that mirrors the performance of the S&P 500. You can do well with this simple approach, but you will lack exposure to many smaller or midsize companies, and will be heavily invested in some industries (such as technology) but not others.

Here are some sectors and asset classes that you can invest in to make your portfolio truly diverse.

1. Utilities

They aren't the sexiest investments, but this sector contains many great dividend stocks that can boost your income while offering the stability your portfolio might need. Consider that during the market tumble between 2007 and 2009, the S&P 500 lost about half its value, while the Dow Jones Utility Average index lost about one third.

Right now, utilities make up around 3 percent of the S&P 500, so many investors don't have much exposure. Consider mixing in some utilities by investing in mutual funds like the Vanguard Index Utilities Fund [VUIAX] or ETFs such as the iShares Global Infrastructure ETF [IGF].

2. Materials

This is another underappreciated sector that deserves more love from investors. What are "materials" in stock market lingo? This refers to companies that discover and process raw materials. Think of steel manufacturers, mining companies, or chemical producers. The materials sector also makes up about 3 percent of the S&P 500, but has outperformed the broader stock market over the last year. Materials also outperformed the S&P 500 during the Great Recession.

Well-performing materials mutual funds include Vanguard Materials Index Fund [VMIAX] and the Fidelity Select Materials Portfolio [FSDPX].

3. Telecommunications services

This sector includes companies such as Verizon, AT&T, and T-Mobile. Companies like these have not been the best performers in recent years, but they can bring stability to your portfolio and offer a very healthy dividend yield. Investors might earn an annual dividend of 5 percent or more with these stocks, which is helpful income during this time of low interest rates. Older investors who are willing to sacrifice growth for income and stability may want to take a hard look at telecom services, which currently make up about 2 percent of companies in the S&P 500.

4. Energy

This sector comprised more than 10 percent of the S&P 500 as recently as three years ago, but that's down to about 6 percent now. That's a shame, because the sector includes some very strong companies including ExxonMobil and Chevron. It's been a very volatile few years for the energy sector due to the tumble in oil prices, but there are bargains to be had, and the world is not going to cease demanding energy, especially from developing countries. Investing in green energy can offer some growth opportunities, and you'll be helping the planet in the process. Energy stocks can also offer higher dividend yields than many sectors.

5. Consumer staples

This sector likely has some of the most familiar stocks you can think of. Currently making up over 8 percent of the S&P 500, consumer staples includes firms like Coca-Cola, Procter & Gamble, Unilever, and Walmart. And yet, this sector is somewhat underrepresented in the S&P 500. This sector is considered a safe haven for investors, because it often performs better than other sectors during times of market uncertainty. That's because even during the worst of times, we all still need basic household products. This sector also has an average dividend yield of nearly 3 percent, making it attractive to income investors.

To get more exposure to consumer staples, take a look at ETFs such as the iShares Consumer Goods ETF [IYK] and Vanguard Consumer Staples ETF [VDC].

6. Small cap stocks

When you invest in the S&P 500, you're investing only in the largest companies. These companies may offer solid returns, but it's never good to be invested too heavily in companies of a similar size. To build a truly diversified portfolio, it helps to invest in a healthy dose of smaller companies as well. Small cap stocks are generally those with market capitalization between $300 million and $2 billion. These firms tend to be more volatile, but their gains can be more dramatic. Consider that the T. Rowe Price Small Cap Fund [OTCFX] has averaged a return of around 20 percent over the last year, compared to about 16 percent for the S&P 500. Small cap value stocks — comprised of small companies generally considered undervalued by fund managers — have performed even better over the last year.

7. Mid-cap stocks

Not too big and not too small, mid-cap stocks include some very well-run companies in a wide range of industries, and they can bring growth and stability to your portfolio. If you want to invest in midcaps, forget the S&P 500 and go with the S&P 400, which includes the top mid-sized companies and routinely outperforms the smaller and larger asset classes.

The Vanguard MidCap ETF [VIMSX] has seen a 10 percent annual return since 2004, and the T. Rowe Price Midcap Growth Fund [RPMGX] has seen a 13 percent annual return since the early 1990s.

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It's So Simple: 6 Steps to a Stable Retirement

Emily Guy Birken — Tue, 31 Oct 2017 09:00:06 +0000

If you are new to personal finance, you might find yourself thinking that reaching retirement is sort of like reaching a mythical place like Hogwarts. In both cases, the process required for entry is never adequately explained — and getting there yourself feels more like fantasy than reality.

While it's unlikely that an owl will ever arrive to welcome you to a magical school, retirement is actually attainable for each and every muggle. In fact, the rules for reaching a stable retirement are relatively simple and require absolutely no financial wizardry on your part,

Here are the only six things you need to do to achieve a stable retirement — no magic wands required.

1. Always spend less than you earn

No matter how much you make, you need to live on less than you earn. This is the kind of so-simple-it-feels-obvious advice that many personal finance experts take for granted, but keeping your expenses below your income is the cornerstone of saving for a stable retirement. Many people assume that they need to make a certain level of income before they can afford to start saving for retirement, but that's not true. As long as you always spend less than you earn, you can always save toward your retirement.

If you're not sure how to go about reducing your expenses so that you're no longer spending everything that comes in, start by tracking your spending. This will help you better understand where your money is going so you can cut back on unnecessary spending. (See also: Save More and Spend Less by Increasing Your "Mental Transaction Costs")

2. Max out your retirement contributions

Both your employer-sponsored 401(k) and your individual retirement account (IRA) have yearly contribution limits that you should strive to meet every year. The 2017 contribution limits are $18,000 for 401(k) plans (plus an additional $6,000 in catch-up contributions if over age 50), and $5,500 for IRAs ($6,500 if over age 50). The traditional versions of these investment vehicles are tax-deferred, which means you are funding your accounts with pretax dollars. Roth 401(k) plans and IRAs are funded with money you have paid taxes on, but they, like the traditional vehicles, grow tax-free.

Many people can't afford to meet the full contribution limit for their 401(k) plan, plus maxing out an IRA as well. However, getting as close to the maximum contribution as you can for both of these vehicles will put you well on your way to retirement stability. In addition, many employers offer a 401(k) contribution match — and not maxing out this kind of matching program is akin to leaving free money on the table. (See also: How Much Should You Have Saved for Retirement by 30? 40? 50?)

3. Work at least 35 years

While retiring early is a common dream among many workers, leaving the workforce before putting in 35 full years of employment could damage your bottom line in retirement. That's because your Social Security benefits are calculated using the 35 highest earning years in your career. If you have less than 35 years of work experience, the Social Security Administration uses zeros to create your benefit calculation, lowering your average earnings and your payout. If you don't have 35 years of employment history, it's a good idea to keep working to get those zeros replaced in your Social Security calculation.

Doing whatever you can to increase your monthly benefit will make a big difference in your bottom line once you retire. The most important increase you can make is to work at least 35 years total — although waiting as long as you can to take Social Security benefits is also an important strategy for increasing your monthly Social Security check. (See also: 6 Smart Ways to Boost Your Social Security Payout Before Retirement)

4. Avoid debt

We live in a society that tells us we can have it all right now and pay for it later. The problem is that we will indeed pay for it later — with an impoverished retirement. While it may be possible to finance the lifestyle you want with debt, you will have no money available to save for retirement or otherwise invest. In addition, the added interest expense of borrowing money to pay for your lifestyle just makes it that much more expensive and unsustainable. (See also: 5 Ways to Pay Off High Interest Credit Card Debt)

5. Invest for the long-term with index funds

While the movies show investing as a kind of game that you win by figuring out when to buy low and sell high, the best way to make sure your money grows is to follow a long-term buy-and-hold strategy.

A 2016 DALBAR study on investment behavior revealed that investors routinely underperform the market despite solid annualized returns. For example, at the end of 2015, the S&P 500 was averaging a return of 8.19 percent. That same year, investors saw returns top out at a measly average 4.67 percent — and this pattern is not new. Why such a discrepancy? Simple; rather than employing a buy-and-hold strategy, investors routinely try (and fail) to time the market. Year after year, their returns suffer as a result.

You can use statistics and a long investment term to your advantage by investing in index funds. These funds aim to replicate the movement of specific securities in a target index, which means an index fund is going to do about as well as the target securities will do. (See also: Want Your Investments to Do Better? Stop Watching the News)

6. Take care of your health

Your health can have an enormous impact on your financial stability in retirement. That's because health care costs are a major concern in your older years, especially since this is one aspect of your retirement budget that you may not have control over. According to a 2016 Fidelity study, a 65-year-old couple retiring in 2016 will need about $260,000 to cover their medical and health care costs for the rest of their lives.

While kale smoothies and daily kettlebell workouts cannot ensure your good health in retirement, taking good care of yourself throughout your life does improve the odds that you'll stay healthier as you age. You can consider each jog and healthy meal as an investment in your future. (See also: Don't Let Poor Health Kill Your Retirement Fund)

Reaching retirement, one step at a time

Achieving a stable retirement doesn't require any magic. Instead, it's a matter of following some simple rules that will ensure you have the money you need to retire comfortably.

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This article is from Emily Guy Birken of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

8 Types of Investors — Which One Are You?

Dr Penny Pincher — Fri, 08 Sep 2017 08:00:05 +0000

Do you tend to invest in a particular way? Identifying which type of investor you are can help you understand the potential pitfalls of your investment approach — and how to improve your chances for better investment returns. Which type of investor are you?

1. Automatic investor

The automatic investor is all about convenience. Everything related to investing is set on autopilot. Automatic contributions to investment funds come out of every paycheck or are withdrawn from the bank account on a certain day of the month. This type of investor doesn't spend much time or effort thinking about investing, and doesn't need to since everything is automatic. They don't have to remind themselves to invest; it's checked off their financial to-do list.

The potential downside for the automatic investor is losing touch with where investment funds are going and how the investment portfolio is performing. If you are not paying attention, you may not have investment selections that meet your current goals, and you may not identify and remove low performing investments or funds with high fees. If you don't check in at least occasionally, this hands-off approach may cost you. Rebalancing your portfolio once or twice a year by transferring funds to maintain your desired proportions of stocks to bonds should be sufficient to keep your investment portfolio on track. (See also: The Most Important Thing You're Probably Not Doing With Your Portfolio)

2. Daily Dow watcher

The Dow watcher is constantly up to speed. They know at any time if the stock market is up or down. The current market price and chart is only a tap away on their smartphone. This type of investor knows how much their portfolio is worth and worries about how much they are losing when the market has a bad day. Nothing goes over the Dow watcher's head.

The risk for the Dow watcher is that he or she can easily get stressed out by day-to-day ups and downs in the market. They may even get discouraged when the market is going down and decide to sell stock when the price is low — the worst time to sell! It's good to be informed, especially when it comes to your investments, but if you find yourself too glued to the Dow's daily performance — it might be a good idea to step away from the news for a bit. Checking in on the stock market and your investment portfolio quarterly is probably more than frequent enough, and you can use the time you save for something more productive and enjoyable.

3. Active trader

The active trader is a studious investor. This type of investor tries to time the market by figuring out that a stock is going up before other investors realize it — and then selling when it is near the peak price before most investors figure out that it is going down. This type of investor pores over market and economic data, reads business articles, and is well-informed about business trends and news. He or she is willing to take risks for a chance at big returns.

If you're an active trader, tread carefully; you can easily lose significant money if your timing is off. Trading fees can also get expensive if your investment approach requires making a lot of trades. You are much more likely to make money from buying good stocks and holding them for the long haul.

4. Conscientious investor

Conscientious investors put their money where their morals are. They have limits to what activities and products they are willing to be involved with in order to make a buck. For example, some conscientious investors invest only in socially-responsible or environmentally-responsible companies, and avoid owning shares in companies that promote values or products contrary to their moral principles. This type of investor is likely to exert economic influence through consumer purchasing decisions as well as through their stock picks.

This type of ethical investing unfortunately can limit a person's investment options, which may result in lower returns. But some things are worth more than money to conscientious investors. (See also: A Simple Guide to Socially Responsible Investing)

5. Property investor

Not every investor owns stocks. The property investor owns real estate, collectibles, gold, and maybe even bonds. He or she wants to invest in things that they can understand and control to some extent. This type of investor may not trust Wall Street and avoids the volatility of stocks.

Historically, however, stocks have had great investment returns compared to other investment types, so property investors who shy away from the stock market could be missing out. Large cap value stocks can be a relatively safe way to start off in stock investing for first-time stock investors.

6. Bargain investor

This is the kind of investor that pounced on GM stock when it was $1 per share in 2009. Of course there is risk that bargain stocks could become worthless, but there is potential for the stock price to bounce back. The bargain investor looks carefully at P/E ratios to check the share price relative to earnings per share when deciding what stock to buy.

Bargain hunters should be wary though — sometimes stocks with low prices are trading at a low price for a good reason. The bigger the bargain, the more research is merited into why the price is so low before you buy.

7. Company loyalist

The company loyalist owns a disproportionate amount of stock from an individual company. This could be a trendy stock that inspires loyalty like Apple or Tesla, or the company loyalist could own a large amount of his or her own employer's stock.

Owning a large amount of any single company stock can be risky. The company could experience a major scandal or product failure and the stock price could tank. Remember Enron? Owning a lot of stock in the company you work for is even riskier, because if something goes wrong you'll not only lose value in your stock fund, but you may lose your job at the same time. Some financial advisers suggest that owning more than 10 percent to 15 percent of your company's stock may be too much.

8. Portfolio tweaker

The portfolio tweaker is not really an active trader, but likes to adjust and fine tune his or her portfolio frequently by making transfers between funds to get the desired balance between large cap, mid cap, small cap, foreign, domestic, growth, value, and bond investment categories.

While it is good to adjust your portfolio occasionally to meet your investment goals, frequently selling investments that are performing well just to meet an arbitrary "balance" in your portfolio may not be the best move and could hurt your overall return. As we advised the automatic investor, portfolio rebalancing once or twice per year is a good interval for most investors.

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This article is from Dr Penny Pincher of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

Is Dollar Cost Averaging the Right Strategy for You?

Dan Rafter — Mon, 24 Jul 2017 08:30:14 +0000

You've just received a bonus or an inheritance, and you know that investing your money in stocks and bonds is one of the best ways to create long-term wealth. But you're also worried that your investments might lose value instead of gaining it.

It's a common struggle: You want the financial rewards that can come with investing, but the potential risk of losing money nags at you. (See also: How to Get Over These 5 Scary Things About Investing)

An investing strategy known as dollar cost averaging might be the answer.

What is dollar cost averaging?

In dollar cost averaging, you invest just a small chunk of money at a time. This differs from the more traditional approach to investing, in which you'd invest all the money that you've targeted for stocks, bonds, or real estate at the same time.

Say you've inherited $6,000. You'd like to invest that money in the stock market so that it will grow over time. If you were investing in the traditional way, you'd invest that money all at once. With dollar cost averaging, though, you would invest more gradually, perhaps investing $500 each month throughout the course of a year. That way, you'd buy more stocks when prices are low, and fewer stocks when they're high. (See also: 9 Investing Questions You're Too Embarrassed to Ask)

The main benefit of dollar cost averaging is that it reduces your financial risk. Say you invested all that money in stocks at once. A market crash three months later would then impact all your money. But if you'd just invested, say, $1,500 before the market crashed, you'd still have $4,500 of your original $6,000 left untouched by the financial turbulence.

Paycheck contributions versus lump sum investing

If you contribute the same amount to your 401(k) every paycheck, that's equivalent to dollar cost averaging. By default, most people have the same amount deducted from their paycheck each month, so there is no choice to make. Dollar cost averaging, however, usually refers to a choice the investor makes when they've got a lump sum of money, such as an inheritance, royalty check, or bonus. If you don't have a windfall of some sort, you usually don't have to worry about whether or not to do dollar cost averaging.

Pros and cons

The main advantage of dollar cost averaging is the reduced risk of losing as much money in a market downturn. But there's another advantage, too: Dollar cost averaging makes it easier for reluctant investors to enter the market.

If you're hesitant about investing, you might find it easier to take the jump if you are investing a smaller amount of money. And that's a good thing: Over time, the stock market has tended to increase in value. If you don't invest, you won't get the chance to take advantage of this.

Anything that encourages you to invest — such as dollar cost averaging — is a positive.

There is a drawback, though, to this approach: By limiting your risk, you are also limiting the potential size of your financial rewards.

Because the stock market has historically increased in value over time, the odds are that you'll make more money if you invest a larger sum all at once. The sooner you invest the money, the more time it has to grow. By contrast, if you invest smaller bits of money over time, you will tend to see smaller returns in what has historically been an upward-trending market.

A recent study by Vanguard illustrates this. Vanguard studied whether people would see higher returns by investing a large sum of cash all at once or in smaller doses over a six-month period into a portfolio of 60 percent stocks and 40 percent bonds. They found that investing the lump sum of cash all at once produced higher returns about two-thirds of the time. The longer the investment period, the higher the chance that the lump sum investment would outperform the dollar cost averaging strategy. (See also: The Basics of Asset Allocation)

You'll have to decide whether the reduced risk outweighs the potential of losing out on bigger returns.

Of course, it's most important that you do invest your money over the long term. And if dollar cost averaging, and the reduced risk that comes with it, is what encourages you to do this, then it might be the best approach for you.

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This article is from Dan Rafter of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread: